The Impact of Sin Tax on the Consumer’s Demand for Cigarettes Essay Example

The Impact of Sin Tax on the Consumer’s Demand for Cigarettes Paper Marlene B. Escamillan 4E1 The impact of sin tax on the consumer’s demand for cigarettes Introduction The raise in tax is one of the most valuable gauges to lessen the utilization of a good. Just the same as other taxes, a sin tax is charged to lift up proceeds for government expenditures. Different from other taxes, a sin tax is often imposed with an intention of reducing the public’s consumption of a good. On the other hand, when you articulate about taxing cigars and alcoholic beverages, consumption emerge to be unpredictable especially to the mass. The policymakers’ main concern is that an increase in cigars and alcoholic beverages taxes could have an inconsistent impact on the underprivileged (Jose Julian Escario, Jose Alberto Molina, 2004). Escario, et al. also found that the increase in the actual worth of taxation on cigarettes  has had slight effect on demand  from smokers for the reason that demand has been inelastic. But there are signs that a tipping point may have been reached. Sin taxes are also the most effective way to influence adolescent people to refrain from smoking. On the other hand, an increase in the price on cigarettes  has had slight effect on demand  from smokers since demand has been inelastic. Thus, what really is the elasticity of the demand for cigarettes to the mass? The purpose of this paper is to stimulate the impact of sin tax on the consumption of cigarettes of regular smokers. Point of view From an economic perspective, the researcher finds it more sensible to consume the standard cigarette because of the satisfaction it yields to the consumers. It is also efficient for the societal well being of the country because the tax charged will still be returned to us eventually. We will write a custom essay sample on The Impact of Sin Tax on the Consumer’s Demand for Cigarettes specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on The Impact of Sin Tax on the Consumer’s Demand for Cigarettes specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on The Impact of Sin Tax on the Consumer’s Demand for Cigarettes specifically for you FOR ONLY $16.38 $13.9/page Hire Writer In addition, based from the study, the researcher would rather utilize the standard good at a lesser demand rate rather than substituting the good in view of the fact that substituting the good would not be as satisfying from what you have been used to smoke. If the taxing of cigarettes will be put into practice, there is an option for smokers to trim down their consumption. Method 50 surveys were dispersed randomly to gather the data needed for prices, and demand for cigarettes. The survey was developed by the researcher. The prices of the usual brand, the substitute brand, and the demand for cigarettes were all answered in the form of a probit model. The price of the standard cigarette brand, and quantity demanded of the substitute cigarette brand are the explanatory variables, while demand for the standard cigarettes is the exogenous variable. Allowance was employed to determine on which income group the student belongs to. Prices were varied through its increase due to tax implemented. Meanwhile, the demand for cigarettes was gauged by the quantity consumed by the buyers. Equation 1: QDstandard = [pic] + [pic] Pstandard + [pic]QDsub + e The regression model is made known above. QDstandard stands for the quantity demanded for the standard cigarette brand; Pstandard corresponds to the price of the standard cigarette brand with tax implemented; QdSub embodies the quantity demanded of the substitute good which is inexpensive than the other good. Results Regression results of QDstandard on Pstandard, and QDsub |Dependent Variable: QDstandard | |Included observations: 50 | |Variable |Coefficient |Std. Error |t-Statistic |Prob. | |C |13. 66452 |0. 595734 |22. 93727 |0. 0000 | |Pstandard |-0. 176294 |0. 066267 |2. 660363 |0. 0145 | |QdSub |-0. 126506 |0. 043445 |-2. 911854 |0. 0086 | | | | | | | |R-squared |0. 905023 | Mean dependent var |14. 2297 | |Adjusted R-squared |0. 893151 | S. D. dependent var |0. 265487 | |S. E. of regression |0. 086782 | Akaike info criterion |-1. 919279 | |Sum squared resid |0. 180745 | Schwarz criterion |-1. 728964 | |Log likelihood |30. 86991 | F-statistic |76. 23089 | |Durbin-Watson stat |1. 193801 | Prob(F-statistic) |0. 000000 | Regressing prices of standard cigarette brand with tax implemented (Pstandard), and quantity demanded the of substitute good (QdSUB) shows all explanatory variables are statistically significant at 95% confidence level. If the price of the standard good increases by 1 unit then quantity demanded for the standard cigarette good decreases by 1. 76 The results explains that if sin tax is implemented, the demand for cigarettes in the middle class will decrease. Furthermore, if the quantity demanded of the substitute good increases by 1 unit, the quantity demanded of the standard good decreases by 1. 27. Based on the survey, middle class consumers will still buy their standard cigarette even if the price increases, while not as much as they used to when the price was lower. Never the less, low-middle class respondents would locate an alternative good if the price of their standard good will increase. When substitution takes place the tax turns into a distortion. To supplementary prove the study, the graph below gives an idea about the effects if tax is implemented. In graph 1, point U1 shows that those who give importance to the standard good more, thru the satisfaction they have for their product, have a steeper demand curve (D1). In this case, a price increase won’t distort their consumption for the standard good. Although loyal consumers’ quantity demanded will decrease, they will still pay out the same amount of money only receiving less amount of that product. In addition, point U2 demonstrates those who will be more satisfied of the substitute which is inexpensive than the standard good. Substitution effect takes place in point U2. Graph 1 Moreover, to further provide evidence for the analysis of the survey regarding consumers’ demand on standard cigarettes, D1 clearly reveals how consumers respond with tax added to the real price. Even with the increase in price, consumers will not be affected that much for the reason that of the inelasticity of its demand curve. In this situation, producers surpass the entire tax burden to the consumers. Nonetheless, D2 shows the analysis of consumers who would find a substitute good if tax is implemented. As illustrated, D2 is less steep compared with D1 which means that those consumers who have a demand curve as of D2 will be highly affected if price increases. When consumers have a demand curve as d2, they are more likely to be avoiding tax and go for the substitute good which creates distortion in the economy. Conclusion From the study conducted, results clearly show that as price of cigarette increases, the quantity demanded vary depending on the type of consumer. On one hand, if the consumer belongs to the middle class, they are more likely to consume the standard brand of cigarette regardless of the price increase but with a lesser amount of quantity. On the other hand, if the consumer is rice elastic, the consumer will more likely consume the substitute good. The demand elasticity for cigars clearly depends on the type of consumers. Source: www. econpapers. repec. org http://tutor2u. net/economics/revision-notes/as-markets-price-elasticity-of-demand. html http://www. tobaccoinabgnustralia. org. au/13-1-price-elasticity-of-demand-for-tobacco-produc Modelling the optimal fiscal policy on tobacco consumption: by Julian Escario, Jose Albe rto Molina 2004. Journal of Policy Modeling Volume 26, Issue 1, January 2004, Pages 81-93 Price U2 U1 D2 D1 Quantity